Amoco (UK) Exploration Company (A Company Incorporated in Delaware, USA) and Others v. Teesside Gas Transportation Ltd andv. Imperial Chemical Industries Plc and Others (Consolidated Appeals)

A contractual commencement notice which activates reciprocal commercial obligations may remain effective despite an unknown latent defect. Its effect depends on the agreement’s language, structure and commercial purpose. Where the notice declares facilities open for business, it need not warrant that immediate performance is possible in every respect.

A requirement that facilities be available or capable of performing a service may permit ordinary operational adjustments and co-operation. A payment reduction for unavailable capacity applies only during a period when the operator is contractually obliged to provide the relevant service.

The appellants constructed and operated a North Sea gas transportation system. Under a Capacity Reservation and Transportation Agreement, Teesside Gas Transportation Ltd reserved pipeline capacity and became liable for quarterly send-or-pay payments from a notified Commencement Date. Imperial Chemical Industries Plc and Enron guaranteed those obligations.

Langley J held that leakage at the nominated entry-point valves did not make the facilities unavailable. The Court of Appeal reversed that decision because a tie-in could not have occurred on the notified date. The consolidated appeals concerned whether the notice was invalidated by that condition and, alternatively, whether the payment-reduction provisions reduced the send-or-pay liability to nil.

1. The appeals were allowed unanimously. Lord Hoffmann delivered the principal speech. Lord Hope of Craighead agreed with his reasoning, while Lord Hobhouse of Woodborough reached the same result by substantially similar reasoning. Lord Bingham of Cornhill and Lord Scott of Foscote also agreed that the appeals should be allowed. The orders of Langley J were restored.

2. Per Lord Hoffmann and Lord Hope, the Commencement Date notice was intended to identify a fixed point which activated reciprocal obligations. The declaration that the transportation facilities were available was performative: it opened the pipeline for business and signified the operators’ acceptance of their obligation to provide the service. It did not warrant the existence of a particular objective state of immediate readiness. A notice given in the operator’s bona fide belief that the service could be provided remained valid despite an unknown latent defect: paras 22–33 and 45–49.

3. Per Lord Hobhouse, the agreement could be read as requiring facilities capable of performing the service before notice was given. Capability was nevertheless a commercial standard. It allowed ordinary adjustments, testing, operational procedures and the co-operation contemplated by the agreement. The contract did not require a turn-key or push-button facility permitting an immediate tie-in on the notice date: paras 52–56.

4. The Court of Appeal’s construction was inconsistent with the agreement’s commercial structure. It would retrospectively unsettle the Commencement Date, remove obligations from both sides and require repayment of a substantial income stream whenever a remediable defect later emerged. The agreement instead protected the customer through the operators’ construction and performance obligations and through a separate reduction mechanism for unavailable capacity: paras 23–33 and 46–48.

5. Per Lord Hoffmann, clause 7.5 did not reduce the send-or-pay payments. Capacity could not be unavailable for provision of the Transportation Service during a period when the operators had no obligation to provide that service. Under clause 5.14, the service could not commence until the customer’s facilities had been constructed, tied in, certified, tested and commissioned: paras 34–39. Lord Hobhouse likewise rejected the clause 7.5 argument, both as a matter of construction and because the necessary factual findings were absent: para 60.

1. House of Lords: The consolidated appeals were allowed unanimously. The Court of Appeal’s decisions were reversed and the orders of Langley J were restored: [2001] UKHL 18.
2. Court of Appeal: Allowed the respondents’ appeals on the ground that the nominated entry point was not available on the notified Commencement Date because an immediate tie-in could not then have occurred.
3. High Court: Langley J dismissed the challenges to the validity of the Commencement Date and held that the entry point was available within the meaning of the agreement.